Executives at AIG say they had to pay employees $165 million in bonuses, despite the fact the insurance giant needed more than $170 billion in a federal bailout, in part because Connecticut law would penalize them if they didn’t.
As absurd as that sounds, legal experts say the company could expose itself — and by extension taxpayers — to lawsuits by the employees for failure to satisfy its contractual obligations.
The company’s use of the Connecticut Wage Act to justify the bonuses is indeed shameless, as Attorney General Richard Blumenthal says.
AIG is claiming it had to pay the bonuses because the eligible employees work in the company’s financial products unit in Wilton. It contends that Section 31-72 of the state law (for a link to the relevant statutes go to www.HartfordBusiness.com) requires wages due to an employee be paid or the company must pay double. In this case, the company argues the wages are in the form of contractual retention bonuses.
The issue, at least as it pertains to Connecticut law, is whether the bonuses can be considered “wages.” Legal experts say if the bonuses were tied directly to individual employee performances, they might indeed be considered wages under the law.
There are endless examples of companies that have decided not to pay bonuses based on those companies’ overall financial performance. But AIG’s bonus agreements required that payments in 2008 be equal to those in 2007, according to New York Attorney General Andrew Cuomo. In other words, the company’s financial 2008 performance was irrelevant.
It defies logic to suggest that a company’s financial picture shouldn’t play a factor in whether individual employees, including many who had key roles in the company’s overall performance, are entitled to receive the extra benefit of a bonus.
Certainly, the doctrine of “commercial impracticability,” which lets a company off the hook if unforeseen circumstances prevent it from honoring all the provisions of a contract, should be in play here.
Still, if Connecticut’s law does expose financially struggling companies to significant penalties for killing such bonuses, the law needs to be changed.
Gov. M. Jodi Rell made the right call by ordering state Consumer Protection Commissioner Jerry Farrell Jr. to determine whether the bonuses can be voided under the Connecticut Unfair Trade Practices Act (CUTPA).
And Blumenthal pledged to use “any and every well-founded legal weapon to recapture these baseless bonuses at AIG” and said he would support any legislative proposals that “credibly and effectively” prevent future bonuses.
State Democrats are calling for an 80 percent surcharge on bonuses given to employees of companies that receive federal bailout money. They argue that 80 percent is appropriate because taxpayers own 80 percent of AIG.
In the midst of all this political posturing, Connecticut authorities need to act swiftly to make sure state statutes don’t provide financial shelter to executives who have such little regard for the public.
Now is the time for a bipartisan effort to protect taxpayers from inappropriate financial decisions by companies that receive significant taxpayer aid.
Given the track record of state leaders, Connecticut residents have a right to be skeptical about whether such an effort will be successful.
